framework for the determining a domestic systemically

Framework for the

Determining a Domestic

Systemically Important Bank

and Higher Loss Absorbency

Requirement

August 2021

Framework for Determining a D-SIB and HLA Requirement August 2021 (draft)

Central Bank of Trinidad and Tobago 2 | P a g e

TABLE OF CONTENTS

1. INTRODUCTION .......................................................................................................................................... 3

2. PURPOSE, APPLICATION AND SCOPE .................................................................................................... 3

3. D-SIB IDENTIFICATION METHODOLOGY ............................................................................................. 4

4. THE HIGHER LOSS ABSORBENCY METHODOLOGY .......................................................................... 4

5. D-SIB HIGHER LOSS ABSORBENCY REQUIREMENT .......................................................................... 9

6. TRANSITIONING AND DISCLOSURE .................................................................................................... 10

APPENDIX 1: D-SIB INDICATORS BY JURISDICTION .............................................................................. 11



1. INTRODUCTION

1.1 The financial crisis of 2007-2009 showed that the failure/impairment of global

systemically important banks (G-SIBs) could severely impact the financial system and

consequently harm the real economy, requiring public sector intervention to restore

financial stability. In response to this, the Basel Committee on Banking Supervision

(BCBS) adopted a series of reforms to improve the resilience of banks and banking

systems, which include reducing the negative externalities and spillover risks posed by

G-SIBs.

1.2 Further to this, the BCBS considered it appropriate to address the possible externalities

posed by banks at a domestic level. Domestic systemically important banks (D-SIBs)

are those whose failure or distress can potentially cause a negative impact on the

domestic economy. Systemic importance is measured in terms of the impact of the

failure of the bank rather than the risk that failure can occur. The BCBS’ D-SIB

framework1 is the complementary perspective to the G-SIB regime2 whereby local

supervisory authorities identify, assess and apply increased surveillance and other

supervisory measures to banks that are systemically important within that jurisdiction.

1.3 This framework will focus on the identification of D-SIBs and the corresponding higher

loss absorbency (HLA) requirements, also known as the D-SIB capital charge. It is

intended that it will be a component of a broader scheme for the monitoring of

systemically important financial institutions (SIFIs) of which D-SIBs are a subset.

1.4 The imposition of a D-SIB capital charge is a key element of Phase 2 of the Central

Bank’s implementation of Basel II/III, aimed specifically at enhancing the quality and

quantity of capital held by D-SIBS.

2. PURPOSE, APPLICATION AND SCOPE

2.1 The D-SIB framework is made pursuant to regulation 20 of the Financial Institutions

(Capital Adequacy) Regulations, 2020 (“the Regulations”) and applies to any financial

institution licensed pursuant to the Financial Institutions Act, 2008 (FIA).

2.2 The capital charge to be applied to a D-SIB will be in addition to the other minimum

capital requirements and buffers and must be in the form of Common Equity Tier 1

(CET1) capital. It is intended to reduce the probability and impact of failure of D-SIBs

as their failure is expected to have a greater impact on the economy than that of non-

systemic institutions.

1 Bank for International Settlements – A framework for dealing with domestic systemically important banks. 2 Bank for International Settlements – Globally systemically important banks: updated assessment methodology

and higher loss absorbency requirement.



2.3 The purpose of this framework is to provide the methodology that will be used to

identify D-SIBs and determine the appropriate HLA requirement applicable to the D-

SIB.

2.4 The D-SIB charge detailed in this framework applies, in the first instance, to licensees

at the bank level, on an individual basis. However, subsequent reviews of the

framework may assess banks on a consolidated basis3 as well in keeping with BCBS’

principles4. The D-SIB additional capital charge will not be applied to financial holding

companies.

2.5 On an annual basis, the Central Bank will review its list of D-SIBS and the

required HLA using the methodology set out in this document. The methodology

itself will be reviewed periodically (every two years) to ensure its continued relevance

and compliance with international best practices.

3. D-SIB IDENTIFICATION METHODOLOGY

3.1 The Central Bank’s D-SIB identification methodology considers three (3) factors,

namely size, interconnectedness and substitutability. For each institution, various

quantitative indicators (e.g. asset size, share of deposit market) will be used to

determine each factor based on their relevance and data availability. Some indicators

relate to the institution’s importance within the financial sector while others are aimed

at capturing the institution’s importance to the wider economy. For example, when

measuring size and interconnectedness, the reference data is based on the total financial

system. The assessment of substitutability however is based on the banking system due

to the nature of those indicators. This essentially provides a measure of the market

share of each bank for each chosen indicator.

3.2 The D-SIB identification process will be conducted annually using data as at September

of each year to coincide with the release of GDP figures and other key indicators. The

list of D-SIBs will be published on the Central Bank’s website and via circular letter to

the financial industry in December of each year. The HLA allocated to banks identified

as D-SIBs will be formally communicated to each bank to whom it is applicable.

4. THE HIGHER LOSS ABSORBENCY METHODOLOGY

4.1 Leveraging principle 5 of the BCBS’ “Framework for dealing with domestic

systemically important banks”, and the BCBS’ G-SIB process for assessing systemic

3 Meaning the parent bank and its subsidiaries. 4 BCBS “A framework for dealing with domestic systemically important banks” – Principle 4: Home authorities

should assess banks for their degree of systemic importance at the consolidated group level, while host

authorities should assess subsidiaries in their jurisdictions, consolidated to include any of their own downstream

subsidiaries, for their degree of systemic importance.



importance, the indicator based approach and weighting system developed by the

Central Bank is tailored to the local economy. Three factors are used to determine

systemic importance of a bank: size, interconnectedness and substitutability.

4.2 In assessing a bank’s systemic importance within Trinidad and Tobago’s economy, the

Central Bank’s D-SIB framework uses varied weights for each factor in line with its

significance5.

4.3 The indicators and their weightings are and summarized in table 16 and discussed

below:

Factor Indicator Rationale Weight

(%)

Size Total assets/ Total

financial system

assets (s1)

Contribution to

GDP* (s2)

One of the best and

simplest measures of the

size of an institution.

Provides a measure of the

institution’s impact on the

real economy.

20

20

Total weighting for

Size

40

Interconnectedness Intra-financial

system assets/ Total

financial system

assets (i1)

Shares outstanding/

Total Banking

Sector Shares

Outstanding (i2)

Provides a measure of the

bank’s assets held at other

local financial institutions

(incl. insurance, etc.)

Indicates the market value

of all shares held by

investors who may be

impacted by the bank’s

distress/failure.

15

15

Total weighting for

Interconnectedness

30

Substitutability Total deposits/

Banking System

deposits (su1)

Shows the market share for

deposits which is one of the

main services provided by

the banking industry.

7.5

5 For example, size is considered the most significant measure and is thus given the largest weight. 6 The quantitative indicators listed are to be sourced accordingly from the Central Bank’s regulatory returns,

including the CB20, CB40 and CB100B.



Factor Indicator Rationale Weight

(%)

Total loans/

Banking System

loans (su2)

Payment systems

activity*

(transactions,

volume, etc.) (su3)

Structural

components*

(number of

branches, ATMs)

(su4)

Shows the market share for

loans distribution which is

one of the major services

offered by the banking

industry.

Provides a measure of how

much the bank is used to

facilitate payments.

Shows the reach of the

bank with respect to the

availability and provision

of services.

7.5

7.5

7.5

Total weighting for

Substitutability

30

Systemic

Importance

100

* Further components for indicator provided below

4.4 Factor 1 – Size

The size of a financial institution is one of the main contributing factors to systemic

importance within the local economy. The larger the bank, the greater the chance that

its failure would cause disruption to the financial markets in which it operates.

Furthermore, the distress or failure of a large bank would likely damage the confidence

in the financial sector and potentially impact financial stability.

Size is seen as the most significant factor for determining systemic importance in

Trinidad and Tobago’s economy and as such, it has the largest weight of 40%.

The indicators used to measure the size of an institution were selected to reflect the

potential impact its size may have on the local economy should the institution come

under distress. The weight of the indicators are equal.

Size indicators:

(s1) = Total assets / Total Financial System Assets (weighted at 20%) – this

largely captures all activities of the institution and is commonly used as a



measure of size by regulators. The assets of any institution in the sample will

be divided by ‘total financial system assets’ to provide a gauge of its size

relative to the rest of the financial system which includes banks, pension funds,

insurance companies, credit unions etc.

(s2) = Contribution to GDP (weighted at 20%) – proxy indicator that calculates

the market share of each institution for loans to various economic sectors. This

indicator shows how significant each bank is with regards to providing loans to

each sector and the sector’s importance to GDP.

The calculation for this indicator is as follows:

Contribution to GDP (s2) = Σγnk,, where k represents the economic sector

γnk,= αnk * βk, where

αnk = total loans provided by bank ‘n’ to economic

sector ‘k’ / total loans of bank ‘n’, and

βk = sector ‘k’ contribution to GDP = sector ‘k’

production/ total GDP

4.5 Factor 2 – Interconnectedness

The distress or failure of a bank can materially increase the likelihood of distress at

other financial institutions. Thus, the more interconnected a bank is in relation to other

financial institutions, the greater its systemic importance.

Interconnectedness is considered to be another significant factor in measuring

systemic importance with a weight of 30%. The two indicators chosen are considered

to have equal importance in measuring interconnectedness as combined, they capture

most business activity conducted within the financial sector and thus have the same

weight of 15%.

Interconnectedness indicators:

(i1) = Intra-financial assets / Total financial system assets (weighted at 15%)

– this provides a measure of the institution’s assets that are held by other local

financial institutions as a percentage of total assets within the financial system.

where Intra-financial assets (resident) = Interbank funds sold + Due from banks

+ State-owned other financial inst. securities + Privately owned other financial

inst. securities + Quoted stocks and shares (commercial banks) + Quoted stocks

and shares (privately owned other financial inst.) + Mutual funds + Loans to

State-owned financial inst. + Loans to commercial banks + Loans to privately

owned financial inst.



(i2) = Shares outstanding / Total banking sector shares outstanding

(weighted at 15%) – this captures all shares and equity holdings held by

investors who would be impacted in the event of a bank’s distress or failure.

where Shares outstanding = Paid in capital + Paid in surplus

4.6 Factor 3 – Substitutability

The substitutability of a bank refers to the ease in which another bank can replace it in

terms of market participation and as a service provider. The systemic importance of an

institution thus depends on its lack of substitutability. Institutions with large market

share in the provision of key services, or those that provide unique services are less

easily replaced should they exit the market.

The substitutability factor has a weight of 30%. The indicators used to measure (the

lack of) substitutability focus on the main services provided by banks and their

availability. There are four indicators with equal weightings, reflecting their balanced

effectiveness as measures of substitutability. These indicators are specific to the

banking sector as services vary throughout the financial system and thus such

comparisons cannot be made across sectors.

Substitutability indicators:

(su1)=Total deposits / Total banking sector deposits (weighted at 7.5%)

o this shows the market share for deposits in the banking sector which is

a key service provided by banks.

(su2)=Total loans / Total banking sector loans (weighted at 7.5%)

o this provides the market share for loans in the banking sector which is

another key service provided by banks.

(su3) = Payment systems activity (weighted at 7.5%)

o this reflects how much the bank is used to make payments using the

Automated Clearing House (ACH) and other systems such as debit and

credit cards. This indicator is further divided into two components

which will each be given equal weighting.

o (su3) = (volume of transactions / total volume of transactions) * 0.5 +

(value of transactions / total value of transactions) * 0.5

(su4) = Structural components (weighted at 7.5%)

o provides a measure of the bank’s reach and availability with regards to

the provision of services. This indicator contains multiple components

which are given equal weighting.



o (su4) = (number of branches / total banking branches) * 0.25 + (number

of depositors / total number of banking depositors) * 0.25 + (number of

loan customers / total number of loan customers) * 0.25 + (number of

ATMs / total number of banking ATMs) * 0.25

4.7 DERIVING THE D-SIB INDEX

A bank’s D-SIB score is determined by the combination of each of these factors (F) and

their respective weightings as follows:

D-SIB score = 0.4 (F size) + 0.3 (F interconnectedness) + 0.3 (F substitutability)

Each bank’s score will then be set against a minimum of 0.1 or 10% of financial system

activity. The factors and their weights are combined in the D-SIB index and the score

produced indicates the share of systemic importance within the banking sector.

For example, Bank A has the following score:

D-SIB Score Bank A = 0.4 (0.10) + 0.3 (0.06) + 0.3 (0.312) = 0.1492 which is equivalent

to 14.92%

Since the score is above the minimum threshold of 10%, Bank A would be considered

a D-SIB and therefore subject to a D-SIB additional capital charge in line with the

approach detailed in section 5.

5. D-SIB HIGHER LOSS ABSORBENCY REQUIREMENT

5.1 The higher loss absorbency (HLA) requirement, i.e. the D-SIB capital charge, is

intended to reduce the probability and impact of a D-SIB’s failure. Principle 8 of the

BIS’ D-SIB framework recommends that the supervisor in each jurisdiction calibrate

the HLA requirement (aka the D-SIB capital charge) using quantitative

methodologies and without supervisory judgment bias.

In this regard, the Central Bank will apply an additional capital charge to D-SIBs based

on their D-SIB score “X”, depending on which of the four ‘buckets’ the D-SIB score

falls as shown below:

Bucket D-SIB Score “X” ( in %) HLA requirement

1 10 ≤ X < 15 1.0%

2 15 ≤ X < 20 1.5%

3 20 ≤ X < 25 2.0%

4 ≥ 25 2.5%



This bucketing approach will require any institution that meets the D-SIB minimum

threshold of 10% to hold additional capital equivalent to 1% of the bank’s total risk

weighted assets under the Basel II/III framework. Each increase by 5% (or 500 basis

points) will attract a further 0.5% capital charge. These buckets align with the range of

1% - 2.5% for the additional capital charge stipulated in the Regulations. Thus, the

maximum additional charge of 2.5% will be applied to banks that score 25% or above.

5.2 As mentioned previously, the additional capital requirement is to be met with Common

Equity Tier 1 (CET1) capital and is to be added to the Pillar I minimum capital

requirements and the capital conservation buffer.

5.3 Notwithstanding section 5(2) of this framework, and in accordance with Regulation

6(5) of the Financial Institutions (Capital Adequacy) Regulations, 2020, the Central

Bank may impose higher target capital ratios for any licensee, whether it is a D-SIB or

not, that is determined to be exposed to excessive risk.

6. TRANSITIONING AND DISCLOSURE

6.1 Upon finalizing of the Framework and publication of the Notice in the Gazette as

required by the Regulations, the Central Bank will formally notify any institution that

satisfies the criteria in this Framework that it is a D-SIB and the relevant HLA

requirement.

6.2 The Central Bank will also indicate on its website a listing of those banks that it

considers to be D-SIBs in accordance with this Framework along with the

corresponding HLA requirement.

6.3 Upon formal notification of being a D-SIB and the relevant HLA requirement, a bank

will given a period of up to 12 months to comply with the HLA requirement.

Y



APPENDIX 1: D-SIB INDICATORS BY JURISDICTION

INDICATORS

Regulator Size Interconnectedness Substitutability Complexity Cross-

border

activity

Australian

Prudential

Regulation

Authority

Unknown factor

weighting

HLA – Policy

judgement by

national

authorities 1%-3%.

Decided on 1% for

the 4 D-SIBs

Total resident

assets

Intra-financial

system assets

Intra-financial

system liabilities

Securities

outstanding

Large exposures

Assets under

custody

Payments activity

Underwritten

transactions in

debt and equity

markets

Total household

lending

Notional

amount of

OTC

derivatives

Trading and

available for

sale securities

Risk-weighted

assets for

traded market

risk

N/A

Bank of England

Prudential

Regulation

Authority

Equal weighting

for factors and

indicators

HLA – Bucketing

approach 0% – 3%

Total assets Intra-financial

system liabilities

Intra-financial

system assets

Debt securities

outstanding

Value of domestic

payment

transactions

Private sector

deposits from

depositors in the

EU

Private sector

loans to recipients

in the EU

Value of OTC derivatives

(notional)

Cross-jurisdictional

liabilities

Cross-jurisdictional claims

Banque Centrale

du Luxembourg

Equal factor

weighting, varied

indicator weighting

HLA – bucketing

approach – 0% -

1%

Total

exposures/GDP

Domestic total

assets

Employment

Intra-financial

system assets

Intra-financial

system liabilities

Wholesale funding

ratio

Network centrality

Assets under

custody

Loans to domestic

non-financial

sector

Real estate loans

Liabilities from

domestic non-

financial sector

Spatial coverage

OTC

derivatives

notional value

Level 3 assets

Held for

trading and

AFS value

Cross-

jurisdictional

claims

Cross-

jurisdictional

liabilities

N/A



Central Bank of

the Bahamas

Unknown factor

weighting

HLA – 2.5% - 8%

based on the type

of institution and

systemic risk

Total assets

Resident BSD

deposits

Number of

employees

Loan/deposit ratio

Intra-group

exposures (market

loans)

Assets under

custody

Total loans and

advances

N/A N/A

Central Bank of

Nigeria

Size – 30%, Int –

15%, subs – 30%,

complexity – 25%

HLA – additional

1% for all D-SIBs

Total assets Net interbank

transactions

Total net credits

Total deposits

Branch

network

Number of

subsidiaries

N/A

Honk Kong

Monetary

Authority

Size – 50%, Int –

25%, Subs – 25%,

complexity – 0%

Equal division of

indicators

HLA – Bucket

approach 1% -

3.5%

Total assets Interbank activities

Loans to financial

concerns

Deposits from

customers

Loans and

advances to

customers

Business

complexity

Structural

complexity

Operational

complexity

Resolvability

Qualitative

information

N/A

International

Monetary Fund

Total resident

assets

Investment

securities

Wholesale funding

Loan/deposit ratio

Intra-group

exposures

N/A Trading book

Trading book

and qualitative

information

N/A

Isle of Man

Financial Services

Authority

Size - 60%,

substitutability -

40%

Varied division of

indicators

Eligible deposit

liabilities

Value of local

resident

deposits

Total balance

sheet assets

Employment

(compared to

domestic

(Qualitative)

Clearing facilities/

agents for other

banks

Provision of

specialist services

to key sectors in the

economy

Value/number of

residential

mortgages

(compared to total

local mortgages)

Lending to local

businesses

Level of provision

of core retail and

banking services

(Qualitative)

Business

complexity

(involvement

in complex

financial

products)

Structural

complexity

(materiality of

upstream,

N/A



HLA – Bucket

approach 1% -

3.5%

economy/banki

ng sector

employment)

downstream,

as well as

overseas

branches)

Monetary

Authority of

Singapore

Unknown

weighting

HLA – 2% for all

locally

incorporated D-

SIBs

Share of total

assets

Share of total

non-bank

deposits

Share of

resident non-

bank deposits

Number of

depositors with

<$250,000

Network analysis of

interbank system

using centrality

measures

Share of amounts

due to and due from

banks

Share of total

derivatives

receivables and

payables

Share of MEPS+

payments

Share of assets

under custody

Share of gross

bilaterally-

cleared OTC

derivatives

outstanding

Qualitative

assessment of

factors

affecting

resolvability

N/A

Office of the

Superintendent of

Financial

Institutions

Unknown

weighting

HLA – 1% along

with CCB of 2.5%

Total

Consolidated

assets

Intra-financial

assets

Intra-financial

liabilities

Underwritten

transactions in

debt and equity

markets

N/A N/A

Reserve Bank of

New Zealand

Equal weighting

for factors, varied

for indicators

Total assets Top 5 exposures to

banks

Securities issued

Loans to

household and

non-financial

corporations

Agriculture loans

Total deposits

Derivatives

(assets and

liabilities side)

Debt securities

held

N/A

framework for the determining a domestic systemically

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